Benefits and Burdens of the FIRPTA Security Agreement Option

Under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), gain or loss from dispositions of interests in US real property by foreign persons is treated as effectively connected with the conduct of a trade or business in the US. Such dispositions are subject to US income tax, and foreign investors are required to report annually to the Internal Revenue Service (IRS) on the ownership of US real property interests. As an alternative to reporting, the foreign investor may enter into a security agreement with the IRS district director for the Foreign Operations District. The director determines what type and how much security must be provided. The waiver of the reporting requirement provides anonymity for the investor and eliminates the burdensome reporting requirement. However, achieving anonymity through use of the security agreement option may not be possible in the case of an individual owning property directly.